Answer:
Approach:
Introduction
- Define GDP and the importance of this metric.
Body
- Explain the differences between both the methodologies of calculating GDP.
Conclusion
- Conclude stating that the new method is more in line with the global standards.
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Introduction:
GDP is defined as a measure that expresses the economic value of a country’s economic activities. In other words, it is the market value of all the goods and services produced within an economy in a particular period. In 2015, a new series was announced to calculate India’s GDP by upgrading the methodology with new data sources to meet UN standards.
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Body:
Difference between old and new methodology:
- Change in Base Year: Prior to 2015, the base year for calculation of GDP was 2004-05. Post 2015, the base year was changed to 2011-12. Change of base year to calculate GDP is done in line with the global exercise to capture economic information accurately.
- Broadening of database: The performance of the manufacturing sector was previously evaluated using data from the IIP and the Annual Survey of Industries (ASI) which has about 2 lakh companies. Post-2015, the firms’ annual accounts filed with the Ministry of Corporate Affairs (MCA 21) are used, which includes around five lakh companies.
- GDP at factor cost replaced by GDP at market price: Previously, GDP at factor cost was calculated. Post-2015, the international practice of GDP at market price and for sector-wise estimation, Gross Value added (GVA) at basic price has been adopted.
- The new measures include not only the cost of production but also product subsidies and Taxes.
- Calculation of labour income: Prior to 2015, there was no difference in the way labour income for different kinds of labour was calculated. The new series has used a concept called “effective labour input” i.e., different weights are assigned on whether one was an owner, a hired professional or a helper.
- Larger coverage of agriculture and financial sector: Earlier, only the farm produce was considered as a proxy for agricultural income. Post-2015, value addition in agriculture including other factors like livestock data are considered. Similarly, the financial sector now includes stock brokers, stock exchanges, asset management companies, mutual funds and pension funds, as well as the regulatory bodies, SEBI, PFRDA and IRDA.
Conclusion:
The shift in the method of GDP calculation depicts dynamism in the growth calculation. The new method is statistically more robust since it considers more indicators and incorporates factors that are more responsive to current changes.
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